A general energy price freeze will stifle the strong competition in the industrial and commercial supply market by removing the demand side pressure suppliers currently face, leading to negative consequences for UK businesses warns think tank the Social Market Foundation (SMF).
In Frozen Out: Business energy supply and the price freeze the SMF examines how different segments of the UK’s energy markets behave; where markets are failing to provide value; and, whether a price freeze is an appropriate policy response to fix these failings.
Frozen Out emphasises the differing natures of the UK’s three energy markets: domestic; industrial and commercial; and, wholesale. It points to a well-functioning market in industrial and commercial energy supply – where most business power is bought – with strong and growing competition. In this market, smaller competitors to the ‘Big Six’ energy suppliers account for more than a fifth of the market share – more than double that held by smaller companies in the domestic market – and the profits of the ‘Big Six’ actually fell slightly between 2009-12.
The SMF argues that a general price freeze policy, intended primarily for the domestic energy market, would damage the industrial and commercial market as it would fail to take into account the demand-side differences between households and businesses, including:
- Businesses are more highly motivated to seek out a better deal than domestic energy consumers, as the cost of power affects their profit and competitiveness.
- Many businesses have access to better information about their energy requirements than domestic consumers and can take advantage of this when negotiating supply contracts.
- Due to the larger scale of their energy consumption, businesses have a level of market power not enjoyed by households, each customer is more important to the suppliers business than is the case in the domestic market.
The SMF calls on political parties to ensure that any future energy price freezes:
- Exclude areas of the industrial and commercial market, which are currently functioning well, on the basis that prices are already competitive and the regulator –Ofgem – has already ruled that no investigation into competition is required.
- Use any investigation into the operation of the domestic energy supply market to apply knowledge of what works in the industrial and commercial market to create better policies for consumers, including:
- Giving domestic consumers greater incentives to switch, including freeing suppliers, and new market entrants in particular, to offer a greater variety of contract options for consumers based upon usage data from smart metres and other data-driven devices
- Creating automated systems, such as reverse energy auctions, which make suppliers compete for domestic customers based on their requirements, shifting responsibility onto companies to generate competition, rather than relying on consumers to shop around for the best deal.
SMF economist Katie Evans, author of the briefing, commented:
“While the UK’s energy markets are far from perfect, current policy debates are failing to recognise and learn from existing successes.
Intervention in the industrial and commercial energy market could make it harder for businesses to get a good deal, and ultimately make British companies less competitive.”
Notes to Editors:
- The briefing, Frozen Out: Business energy supply and the price freeze, is kindly sponsored by Haven Power, Smartest Energy and Opus Energy. The SMF retains absolute editorial control over its outputs.
- The SMF is a leading independent UK think tank which develops innovative ideas across a broad range of economic and social policy, champions policy ideas which marry markets with social justice and takes a pro-market rather than free-market approach smf.co.uk
